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Tuesday, February 16, 2016

Paying the Cost to be the Boss

Last week's news that the Boston-area Craft Brewers Guild has been slapped with a significant license suspension for paying to play shocked the industry. It's easy to assume that shock is related to the suspension, but I suspect there's something else at work.

If you don't know the details, they are these: The Massachusetts Alcohol Beverage Commission issued a 90-day license suspension to Sheehan's Craft Brewers Guild. The suspension came after the ABC discovered the distributor was paying some bars $1,000-$2,000 per tap handle.

The Sheehans reportedly aren't sure what they'll do. They can appeal the suspension, which might lead to it being reduced or maybe tossed out. Another option is for them to pay a fine equal to half of three months worth of revenue, somewhere in the $10-15 million range, say informed sources.

One thing these guys aren't going to do is quietly accept a 90-day suspension. If they do, they might as well shut down. Because a suspension of that length would activate termination clauses in their contracts with suppliers. Breweries can't afford to be off the market for so long. They would be forced to terminate and go elsewhere, and could legally do so.

The list of CBG suppliers is long and includes: 21st Amendment, Allagash, Ballast Point, Bells, Boulevard, Full Sail, Green Flash, Lagunitas and many more.

By the way, the ABC isn't finished. They have nailed a small number of bars for receiving payments and are in the process of investigating additional retailers, brewers and distributors. Those efforts may result in penalties similar in relative severity to what regulators handed the Sheehans.

Of course, the elephant in the living room is that the practice of paying to play is pretty widespread. And not just in Massachusetts. It's everywhere. One of my industry friends tells me there are bars in Portland that demand payment to put on certain beers.

It seems likely the Sheehans will argue on appeal that the practice of paying to play, although illegal, hasn't been enforced. That leads to defacto legalization, forcing them to engage in the practice to compete with other distributors. Not sure what "defacto" means? Look it up.

My guess is the Sheehans will push the defacto argument. They will argue that regulators, by failing to monitor the marketplace, created a situation where pay-to-play became standard. They probably won't win with that argument, but it might get them a reduced fine or suspension.

Look folks, what happened Massachusetts could happen anywhere. And needs to. That's the real reason shock waves are crashing around the industry. Most know pay-to-play is widespread. What if state and federal regulators get serious about stopping it?

There's no particular to reason to believe regulators are getting serious. The Massachusetts case came about only because a now defunct brewery launched a Twitter tirade that resulted in an investigation by the Boston Globe, which lit up regulators who were apparently resting comfortably.

It would be great if the action in Massachusetts encourages distributors, retailers and brewers to abide by pay-to-play laws. There will surely be short-term disruptions while everyone gets on board, voluntarily or forcibly. But snuffing pay-to-play is a worthy cause.